Cfp (Cdn-Advocis) Module 16 -Investments

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Treasury Bills

Back 1

- Sold by Bank of Canada
- bi-weekly auction
- sell at discount
- 3,6,12 month maturities

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T-Bills Taxation

Back 2

Interest Income

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T-Bill & Commerical Paper Taxation if sold prior to Maturity

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Interest = purchase price x Eff rate x (#days held/365)

Cap Gain = proceeds of disposition - int - ACB

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Commercial Paper

Back 4

Short-term debt issued by a corporation.
Higher return then TBill

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Bankers Acceptance

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Promissory note issued by corporation and guaranteed by the bank.

Lower risk/return then commercial paper

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Redeemable GIC's

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Subject to market value adjustment.

If interest rates are higher then the GIC instituiton will pay a lower amount for redemption

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Index-Linked GIC

Back 7

Returns are based on the performance of markets (a %)

Upside and downsides are capped

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Index-Linked GIC
Taxation

Back 8

Taxed as interest income, but only reported upon maturity

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Mortgage-Backed Securities (MBS)

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Pool of mortgages
created through NHA
5 years is common term.

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4 Categories of MBS

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1. Exclusive homeowner
2. multi-family
3. social housing
4. Any combo oof above

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MBS Taxation

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Interest & Capital

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Bonds relationship with interest rates.

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Increasing Interest rates = Decreasing bond prices

Decreasing Interest rate = Increasing bond prices

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Taxation on Bonds

Back 13

Interest taxable

Capital Gains from selling/buying on secondary market.

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Government Bonds
Marketable

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Non-redeemable

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Government Bonds
Real Return Bonds

Back 15

Interest rate adjusted according to CPI

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Government Bonds
Canada Savings Bonds

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Non-marketable - redeemable

after 3 months seller receives face value + int owing up to end of prior month

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Government Bonds
Types of Canada Savings bonds

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R-Series - Interest paid annually

C-Series - Interest compounded annually

** Only c for registered investments

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Government Bonds
Premium Bonds

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Only redeemable on maturity date and the 30 days that follow

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Government Bonds
Provincial & Municipal bonds

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Lease liquid then federal bonds

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Corporate Bondholders

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Take priority over common/preferred shareholders

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Extendible Bond

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Can extend the maturity date at a specified date.

Done if current rates are lower then that of the bond

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Retractable Bond

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Allows for an early redemption

Done if current interest rates are higher then the bond

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Convertable Bond

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Can be exchanged for common shares.

Conversion Price = Par Value/#of shares

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Callable Bond

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Issuer has the right to call the bond at a specific date and price.

Usually bond holder will get paid a premium

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Floating Rate Bond

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Interest rates are market sensitive

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Income Bond

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Interest paid to bondholder based on the corporations prifitability

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Mortgage Bond

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Can be issued as first or second mortgage bond, with the second mortgage bonds have a higher rate

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Strip Bond

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Coupon (interest pymts) are stripped.

Sold at premium

Tax: must include notional amount on tax return.

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Junk Bond

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Issued by corporations with poor credit rating.

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Record Date

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Date the individual must own shares to be eligable for dividends

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Declaration Date

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date corporation announces the next date and amount of dividends oayments

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Ex-Dividend Date

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Any shares bought after this date are ineligible for dividends

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Cum Dividend

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With Dividend

Shares bought prior to ex-date

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Liquidating Dividend

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Paid when corpoaration is going out of business

Taxation: dividend & return of capital

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IPO

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Intial Public Offering

Going public

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Margin

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Portion of purchase price that must be deposited to an investors account when borrowing to buy shares

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Short-Selling

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Borrowing shares and selling at a high price, then re-buying at lower price and returning to lender.

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Preferred Shares
Difference from Common Shares

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1. Do not have Voting rights
2. Dividends - paid first
3.Dissolution - paid first

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Convertable Preferred Shares

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Can be converted to common shares

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Retractable Preferred Shares

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Corp has to buy back shares on a set date for set amount

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Purchase Fund / Sinking Fund

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Corporations right to retire shares on a specific date or over a period of years

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Call Option

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The "option" to buy a security at a specified price.

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Put Option

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The "option" to sell a security at a specified price

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Writers

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Those who sell call/put options

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Intrinsic Value

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Amount by which a security is "in-the-money"

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Straddle

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Investor owns a call and put option on the same security due to volitile market

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Warrant

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Issued by corporation and allows the investor to buy a set # of shares on a set date

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Rights

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Allows shareholder the right to purchase newly issued shares to maintain porportional ownership

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Forward Contract

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2 parties agree to exchange an item in the future at a pre-determined price

ie:event tickets - buy now or at the door

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Futures

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agreement to sell a product in the future at a specific price.

Face value= forward price X quantity
Forward price=set in agreement
Spot Price = current price

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Clone Funds

Back 51

Where used to get around foriegn content limits

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Swap

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Exchange of one security for another.

Used when investors have comparitve advantage in opposite markets

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Closed-End Mutual Fund

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Traded on secondary market

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Unit Investment Trusts (UIT)

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Often invested in bonds etc.
Have a maturity date
Used by onvestory looking for income in the long-term

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Net Asset Value Per Share (NAVPS)

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(Market Value of fund Assets - Liabilities)/# of outstanding shares

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Segregated Fund

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Owned by a trust with the policyholder is deemed benefciary

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Seg Fund - Death of annuitant

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Policy matures and proceeds paid to beneficiaary. Owner must report Capital gains

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Seg Fund - Death of Owner

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Contract Continues and can pass to a spouse as spousal rollover.

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Labour Sponsered Funds (LSIF's)

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Federal Credit = 15% of initial Investment.
Max $5000

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After Tax Cost of LSIF
Non-Registered

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After tax Cost =
Cost x (100%-fed. credit + prov. credit)

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After Tax Cost of LSIF
Registered

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Cost X (100% - (fed. credit + prov. credit)-MTR)

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Income Trust

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Income flows through the trust and is taxed at the hands of the investor

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Flow-Through Shares

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Canadian Companies in Resource Explortion.

Tax advantages allowed to the corporation can flow through to the investor

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Taxation of Foreign holdings

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Interest income of Dividends are fully taxable.

Capital gains are treated the same

Can claim forign tax credit

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Real Estate Investment Trusts(REIT)

Back 65

Trade in secondary market
pay quartely distributions
taxed as mutual funds